You are on page 1of 17

Equity in Distribution of

Unit 11 - Lesson 3

Learning outcomes:

Explain the difference between equity in the distribution of income and

equality in the distribution of income.
Explain that due to unequal ownership of factors of production, the market
system may not result in an equitable distribution of income.
Draw a Lorenz curve and explain its significance.
Explain how the Gini coefficient is derived and interpreted.
Distinguish between absolute poverty and relative poverty.
Explain possible causes of poverty, including low incomes, unemployment
and lack of human capital.
Explain possible consequences of poverty, including low living standards, and
lack of access to health care and education.
Explain the term transfer payments, and provide examples, including old age
pensions, unemployment benefits and child allowances.

Equity vs. Equality

Equity: fair and just
Equality: all is equal
For there to be equality in income, all
people would earn the same amount
of money.
Equity does not mean this though it
could depending on how the word
equity is interpreted.

Income Distribution
From the Circular Flow Model we discussed we know that Households provide Firms
with the Factors of Production and in return the Firms provide Households income.
Ownership of these Factors of Production is highly unequal because the prices for these
factors of production vary greatly within the market.
Education levels of the population vary greatly and therefore the income individuals
receive will vary from very low to very high.
Free markets cannot ensure that everyone in society will receive a wage that covers
their basic needs.
Governments intervene to redistribute this income in the attempt to make sure everyone
can cover these needs.

Indicators: Lorenz Curve

An Economic Model used to show the income
distribution within an economy.
Percentage of Income & Population are split into
quintiles (20%)
Blue diagonal line: perfect equality in Income

20% of Population would receive 20% of

40% of Population would receive 40 % of


Lorenz Curve
Diagonal Straight Line: Income Equality
Bolivia & Belarus
Belarus has greater Income Equality
Point a & e: 20% of the population in Bolivia (a)
makes less than Belarus (e)
Points d & h: 80% of Bolivians make 40% of the
income vs. 60% in Belarus.
The further away the curve is from the equality line
the more unequal distribution of income.

Tragakes, pg. 303

Gini Coefficient
Summarizes income inequality contained in the Lorenz Curve.
Number between 0 and 1.
Calculated as the total area under the diagonal line and the above the
curve. Closer to 0 = greater income equality
Closer to 1 = greater income inequality

Income Redistribution
Governments use many ways to try and
reduce the inequality in the distribution of
income such as taxes. We will take a look at
these more closely later.
As government redistribute income their goal
is to reduce inequality and bring more equity
in income.
This is shown as a shift inwards on the
Lorenz Curve.

Tragakes, pg. 323

Absolute & Relative Poverty

Poverty is the inability of an individual to
satisfy their basic consumption needs.
Poverty Line: An Income Level that does
not allow an individual to cover their basic
needs. (Ex: food, housing, clothing, medical)
Extreme Poverty: Living on less than $1.25
Moderate Poverty: Living on less than

Relative Poverty
Compares incomes of individuals &
households and compares them with the
median income in society.
Relative Poverty looks to measure the
number of people who are not able to
afford the good and services that is
considered typical in society.
Typical is measured by the median
income level of society and the lifestyle in
that country.

Causes of Poverty
1. Low income
2. Low level of Human Capital education & skills
3. Unemployment
4. Low levels of Capital/Land
5. Discrimination
6. Geography
7. Age
8. Limited Social Services provided
by Government
9. Education, Health, & Housing
10. Poverty Cycle


Consequences of Poverty
1. Low living standards: poor health,
poor diet & psychological problems
2. Low access to health & education
3. Higher infant & maternal mortality
4. Higher levels of preventable
5. Social problems
6. Inability to meet full potential
therefore economy not using the
resources efficiently


Methods to Redistribute Income

1. Transfer Payments
2. Subsidized or Direct Provision of
Merit Goods
3. Government Intervention into the
4. Taxation
a. Direct
b. Indirect

Transfer Payments
Payments made by the Government
with the intention of redirecting
income to those most in need.
Examples include:

Old age pensions

Unemployment benefits
Disability benefits
Housing benefits for the poor
Student grants

Subsidized Merit Goods

Two of the most common goods under
consumed by low income people are:
1. Education
2. Healthcare
Government are responsible to make sure
these services are consumed so often times
they are provided free or nearly free of charge.
Other subsidized services include:
1. Water
2. Sanitation

Government Intervention
Forms of Government Intervention

Minimum wage
Food price ceilings
Rent controls
Price Floors for farmers

Taxes help to redistribute the wealth and subsidize the Merit goods
provided by the Government.

Direct Taxes:

Indirect Taxes:



Personal Income Taxes

Corporate Business Taxes
Wealth Taxes
Social Insurance (Social Security)

Sales Tax
Excise Taxes: Gas, cigarettes
Custom duties/tariffs